Auto Insurance Policy Basics

An automobile insurance policy is actually many smaller policies hammered together. What your total policy should look like depends on where you live, what you drive, and what your life situation is.

This lesson:


Lays out the common parts of all auto insurance policies

Links to additional in-depth information on common policy components

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What's in your auto insurance policy?

The major types of auto coverage are liability, medical or personal injury protection, collision, comprehensive, uninsured motorist, and underinsured motorist.

Many drivers also opt to carry smaller policies like towing coverage and daily rental reimbursement.


This, briefly, is what each policy covers:

  • Liability. Probably the most important coverage on an auto policy, standard auto liability is actually made up of two policies, bodily injury and property damage. They cover the cost of injuries and damage you cause to another in an auto accident.

Auto liability coverage limits are usually written as three numbers, say 100/300/50. This policy would provide a maximum of $100,000 worth of bodily injury coverage per person injured, up to $300,000 total for all injuries, and $50,000 in property damage. (Liability coverage is required in basically every state.)

  • Medical payments. This coverage pays for the treatment of the any injuries you might sustain in an auto accident, regardless of who was at fault in the accident. Personal injury protection, or PIP, is similar but broader. It includes coverage for other economic costs, like lost wages or funeral expenses. Medical payments coverage is required in very few states, but PIP is required in every no-fault state, and in some other ones, too.

  • Collision and comprehensive. These optional policies cover damage to your car, regardless of fault. Collision covers damage caused by (you guessed it!) a collision, and comprehensive covers damage caused by almost anything else (vandalism, theft, natural disaster). If your car is financed, you'll probably be required to carry both these policies.

  • Uninsured and Underinsured motorist coverage. These two policies help pay your bills if you're hit by a driver with inadequate liability coverage. They are usually sold as two separate policies, but they may be lumped together as one.

We know it's unfair to have to shoulder the financial responsibilities of those who drive without coverage, but because around 14% of drivers nationally are uninsured, these can be important coverage.

  • Endorsements. This is a catch-all term for all the other optional policies, like daily rental reimbursement, roadside assistance, etc. These policies are always optional.


Next: Lesson 3: The "Philosophy" of Insurance.

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